Facebook’s WhatsApp deal fuels M&A

As Facebook spends $19 billion (R204.9bn) on WhatsApp, half a world away China’s internet giants are in the middle of their own acquisition rush.

Tencent Holdings, Asia’s largest internet company, Alibaba Group and Baidu are seeking targets to plug gaps across their businesses as they vie for China’s 618 million Web users. Citigroup sees the trio driving internet-related deals in China to a record this year, adding to their 44 announced acquisitions since 2012 valued at $18.7bn, according to data compiled by Bloomberg.

For each of the big three Chinese internet companies, there is at least one technology provider that would fill a need. Qihoo 360 Technology, with a market value of $13.2bn might appeal to Chinese e-commerce leader Alibaba because of its anti-virus software, said Guotai Junan International. Travel site Ctrip.com International may lure Tencent, according to Riedel Research Group, while classifieds website operator 58.com could attract China’s largest search engine Baidu, Pacific Crest Securities said.

“It’s going to be a pretty hot M&A space for the next couple of years and that’s really just driven by competition between the three largest players,” Cheng Cheng, a Portland, Oregon-based analyst at Pacific Crest, said in an interview.

Internet-related companies worldwide have already announced $27.5bn of deals this year, led by the Facebook-WhatsApp acquisition, according to data compiled by Bloomberg.

Facebook’s purchase of WhatsApp, the Menlo Park, California-based company’s biggest yet, is aimed at getting a hold of the mobile-messaging service’s 450 million users to stay at the centre of consumers’ digital lives. In related deals, SoftBank, which controls the third-largest US wireless operator Sprint Corporation, is seeking to buy a stake in Naver Corporation’s text-messaging service Line Corporation, people with knowledge of the matter have said.

“People are valuing those eyeballs,” David Riedel, president and founder of Riedel Research, an independent equity research firm, said in a phone interview. For China’s technology giants, “it’s another reason for these companies to remain vigilant about identifying holes in their lineup”.

In China, the importance of services accessible by customers on the move has increased. About 500 million users in the country access the Internet from mobile devices, according to a report published by the China Internet Network Information Centre, about as much as the entire population of North America.

Qihoo, which has more than 408 million users for its mobile-security products and is China’s second-largest search engine, could appeal to Alibaba as a way to bolster its anti-virus and search businesses, according to Ricky Lai, an analyst at Guotai Junan in Hong Kong.

Qihoo’s customer base makes the company “a potential game- changer”, Bank of China’s institutional sales desk in Singapore said in a February 19 note that named Qihoo as a possible target.

Any investment by Alibaba, founded by billionaire Jack Ma, may value New York-listed Qihoo at $20bn, said Alex Wang, a Beijing-based analyst at internet consulting group IResearch. That’s about 51 percent above Qihoo’s stock-market value.

“Alibaba would need to take into account future add-value that Qihoo is bringing,” Wang said in a phone interview. “Qihoo is on the verge of speeding up monetisation on its traffic.”

A representative for Alibaba declined to comment on Qihoo as an investment or acquisition target, as did a representative for Qihoo.

Alibaba, said to be preparing for an initial public offering, has been valued at as much as $190bn. This month, the Hangzhou, China-based company offered to buy the rest of AutoNavi Holdings in a bid valuing the Chinese mapping company at about $1.6bn.

Shenzhen-based Tencent, operator of the WeChat video, voice and texting application, is attempting to compete with Alibaba by combining messaging with services including shopping and gaming.

Tencent’s strength has not been in online shopping or advertising so one option for the $141bn company may be a tie-up, or an equity swap, with Suning Commerce Group, China’s largest electronics retailer, according to Wang at IResearch.

“Tencent has a lot of traffic but it lacks methods to monetise its business,” said Wang. “There is a real motivation for Tencent to invest in or acquire e-commerce companies.”

Another possibility for Tencent could be to acquire an online travel service such as Ctrip, said Riedel.

Shares of Tencent surged to a record in Hong Kong on Friday, before closing 5.2 percent higher at HK$616.50 (R857).

A representative for Tencent did not respond to an e-mail seeking comment, while spokesmen for Suning and Ctrip declined to comment.

Tencent, founded by billionaire Ma Huateng, this month bought a 20 percent stake in Dianping, which runs a food and entertainment review website in China.

Such deals may prompt Baidu to seek other location-based service providers, Echo He, a New York-based analyst for Maxim Group, said in an interview.

Logical targets for Baidu include the $3.2bn 58.com, which went public in October and lets users sell everything from cars to computers, according to Cheng at Pacific Crest. The $6.2bn SouFun Holdings, China’s biggest real-estate information website, also makes sense as a potential acquisition candidate for the $61bn company, Cheng said.

Baidu, founded by billionaire Robin Li, on Thursday forecast first-quarter sales that beat analysts’ estimates. The company will focus on investment this year, crimping profit growth, as it targets marketing for its mobile applications in search, security and location-based services, chief financial officer Jennifer Li told a conference call. Lulu Yilun Chen, Angus Whitley and Brooke Sutherland for Bloomberg

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